Is It OK To Use Credit Cards For Everything, If You Pay Them Off Every Month?

Reader Rebekah has a question about credit cards. She and her husband pay off their cards every month, but like to charge most of their expenses because they enjoy the reward points. She’s wondering if this is a good idea and how it affects her credit.

Rebekah asks:

I was wondering about Credit Cards. Specifically having to do with keeping multiple with no balance vs. none at all. How much does your credit rating get hit when you open a credit card, even if it is a store card? My husband & I pay off our credit cards every month but put everything on them for points reasons & to track our spending. We like to take advantage of the credit card offers with points attached to them since its an actual reward you can use, but is it really worth it?

Would we better off in the long run paying for the reward to ourselves?

First of all, congratulations on paying off your balances every month! Now, as far as having multiple credit cards open with no balance, I’ll assume that we’re talking about a few credit cards — and not some crazy high amount. Sound fair? Ok.

There are several factors that go into your credit score. You’re asking about two of them: Recent credit inquiries, and total available credit.

Credit inquiries fall in a section of your credit score called “New Credit.” This section makes up 10% of your total score. When you apply for new credit, (like a store card, or a credit card) a note is made on your credit report and it is figured into the “New Credit” portion of your score. Everyone’s credit is different. Here’s how Fair Isaac, the company that issues FICO scores, explains the situation:

Inquiries are a subset of the “new credit” category shown above, which accounts for 10% of the total FICO score. Their importance depends on the overall information in your credit report. For some people, a given factor may be more important than for someone else with a different credit history.
…
For many people, one additional credit inquiry (voluntary and initiated by an application for credit) may not affect their FICO score at all. For most people, a credit inquiry will only decrease their FICO score by a few points.

Inquiries can have a greater impact, however, if you have few accounts or a short credit history. Large numbers of inquiries also mean greater risk: People with six inquiries or more on their credit reports are eight times more likely to declare bankruptcy than people with no inquiries on their reports.

So unless you’ve applied for six credit cards in the last few months, you should be OK, which is why for the sake of this answer we’re assuming that you’re not a compulsive credit card collector.

Now, on to the second part of your question. Is it OK to have multiple credit cards with no balances? Yep, that’s just fine. Having multiple cards affects your “credit utilization ratio.” Only you know how many cards we’re talking about here, but the basic idea is that your credit score is affected by how much of your total available credit you’ve used.

Think of all of your credit cards as a big pizza. When you borrow money, that’s like eating a slice of the pizza. The FICO score reflects how much pizza you have left. When you close an account — you’re starting with a smaller pizza!

Now, this doesn’t mean you should go out and apply for 90 million credit cards, but it also means that you shouldn’t worry about having more than one card.

Here’s how Fair Isaac explains it:

Say you have 3 credit cards. Credit card 1 has a $500 balance and a $2000 credit limit. Credit card 2 is an unused card with a zero balance and a $3000 limit. Credit card 3 has a $1,500 balance and a $1,500 limit. In this scenario your credit utilization ratio looks like this:

You can see that your utilization ratio rose from 30% to 57% by closing the unused credit card.

And finally, are credit card reward points worth it?

If you follow a budget and are not spending more in order to “earn” points — then yes. There’s nothing wrong with using a credit card to collect points on things you would have bought anyway. The trouble is that many people don’t actually do this.

Reward points are there to get you to spend more, and if you’re worrying about it enough that you’re writing in to us, perhaps you should take a look at your budget and decide if you’re really getting a good deal.

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Don’t forget that credit cards also carry buyer protections. If you don’t receive your product or receive a defective product, the credit card company works with you to resolve the issue. Many credit cards also include extended warranties. For most people, receiving one bill at the end of the month also makes tracking purchases easier.

Like Rebekah, I purchase everything on credit and pay my card off each month. I have a good credit score and have never noticed any adverse effects from this type of behavior.

@teh: There are no real adverse effects as long as you a) have enough available credit lines that your monthly spending doesn’t consume too large a percentage of them; b) don’t spend more to get rewards points (this depends on what sort of psychology of spending you have, but I suspect this isn’t a problem for most people who actually do pay off their bills in full every month), and c) you actually pay your bills in full.

@taking_this_easy: If you are using 4/7ths of your credit you may not be maximizing your credit score, but honestly, the best thing you can do for your credit scrore is to build a history and be in good standing (e.g. no missed or late payments).

In a few months, ask for your credit to be increased. Most cards will allow a no-fuss credit increase every 6 months.

@taking_this_easy: I did the same thing when I was a student — GOT the card so I could charge books. So the first month it had a ton of charges, and thereafter like $30 a month, or nothing … and then in September and January, crazy charges.

Didn’t have any problem with my credit score when I graduated and went out into the world to do things that needed credit. :) I’m sure that card was, like, the only basis for my credit when I went to try to get utilities for the first time!

@taking_this_easy: That’s consuming a large portion of your credit line, which will cause a temporary credit score hit. However, don’t worry about things you’ve done in the past. While we don’t know exactly how they weight things, in my experience with monitoring my score the utilization mostly only affects your score for the current month that is being reported. So as soon as you pay your card back down to zero, your score will go back up by a good bit. That’s a good thing to remember when you need to apply for something where your credit score actually matters a lot to how much you’ll pay, like a mortgage or student loan. Pay down credit cards a month or two in advance of doing that, and your score will check out a few points higher.

I put almost everything on my main credit card. I get 1.25% cashback on all purchases, and pay it off every 2 weeks. I haven’t seen a single downside to this, and have seen no adverse effect on my credit score.
Cash is for parking garages and losing prop bets.

Of course she won’t be a “prefered” customer since she will pay no outrageous interest, over the limit fees, or late fees. In other words, she will be not as profitable as the half-*ssed customers who DO pay those fees since she will only be bringing in merchant charges to the credit card company(ies). Then the card companies will cancel her cards due to “market changes” or some other BS…

@econobiker: It’s never been my experience that they actually do this…and I’ve been putting everything on credit cards and paying it off in full for a long time now. I’ve saved a lot of money in cash back by doing this.

@econobiker:
Agreed. Me and my wife put everything on cash back cards, and we got $750 back last year. We have been doing it for years, never carrying a balance. We also use as many of the protection services on the cards as possible (extended warranties, free rental car insurance, etc). Never paid any fees to the card. Never had a card cancelled.

The credit card companies don’t seem to mind, they get paid 3% of every transaction we do by the merchant, which is more than we get in cash back and services. I bet they would prefer if we would carry a balance, but they haven’t cut us off.

Yup. There are also some credit card companies that would MUCH rather you did not carry a balance from month to month – AmEx, for example. A customer who uses their credit card like a debit card, putting every single charge they make on the thing, and then pays it off in full without ever carrying a balance, is a) making the credit card company a nice hefty amount in merchant fees and b) posing much less risk than someone who has their card maxed out and is paying interest, but might, y’know, suddenly discover they can’t afford to pay anymore.

There ARE some card issuers whose ideal customer is the one that carries a balance and pays a huge amount in interest – there are even some whose ideal customer is probably one who is forever going over the limit and paying late, and running up charges in the process. They’re catering to a very different part of the market than the credit card companies who like their customers not to be in any NEED of credit, be able to afford to pay everything off in full, but still use a credit card and thus make them a profit in the process.

I had to buy a car through Drive Time because I had ZERO credit. No, really. None, zip, nada. So, I have a crappy APR rate, but at least now I have a car, AND I finally got approved for a credit card through my bank (BofA). YAY! I’m trying to use it monthly, mainly on car payments and insurance payments, things that are in my budget already, and then paying them off monthly, so I can build some more actual credit.

@little stripes: I can’t comment on Drive Time at all. But using a credit card wisely over time is a good way to build credit. A mortgage and personal loans such as a car loan help as well.

The most important thing is to never miss or be late on a payment, consider automatic debits so you don’t have to worry about it or spend time on it or money for stamps. Insurance payments and utility bills are prime candidates for automatic monthly credit card charges. All of my monthly bills are charged to my credit card except for one, which is directly deducted from my checking, and my credit card payments are automatically deducted as well. I pay no monthly bills at all.

Make sure that you scrupulously check your credit card statement, especially if you have charged in restaurants or had refunds.

@little stripes: You don’t have to use the credit card to gain the credit. Just having one and not making any late payments is good enough. I had one open for 14 months that I never even used once, and it built my credit up. My score is a 772 and all I’ve had my whole life is 2 credit cards that I carry zero balance on (I’m 24).

@Mr_Mantastic: Actually not using the card is what WILL make a company decide to pull your credit cards. You provide zero benefit to the company issuing the card.In fact, you caused them an expense to issue the card in the first place. With credit tightening,the banks may decide that you are not the customer they want. You are the person who goes to the coffee shop and orders water and takes up a table that a PAYING customer could be using.

@johnnya2: To the contrary, a table is something that is tangible and takes up space in an establishment. Issuing someone a credit card that they do not use does not take up valuable “space” that the company needs. It’s not like they are losing business from other consumers because I didn’t use my car. The company did not decide to pull my card after the 1+ year that I didn’t use it. I use both of my cards now, but never accrue any interest (and make $300 a year on my AMEX).

There’s nothing wrong with paying off the cards each month. I think all 3 credit reporting agencies take a “snapshot” of the total debt of your card for each billing period. So it really doesn’t matter if you pay it off. Your credit report will still show your total purchases and your ability to pay them.

Your credit report/score is indeed a ‘snapshot’ of your credit situation (as of the last time each creditor reported to the CRAs) on any given day. Thing is, that most credit card companies report the closing balance on your statement to the CRAs. So, if you have a card with a $5,000 limit and regularly run the balance up to $4,500 and then pay it off in full as soon as you get the statement, the balance showing on your credit reports is going to be $4,500 – it’ll be whatever the balance is when your statement cuts. This will make your card appear to be almost maxed out (even if you do pay it down to zero as soon as you get the bill), and this WILL have a negative effect on your credit scores. If you have a reason to care about your scores (about to apply for a mortgage or buy a car, or just don’t want to spook other creditors into thinking you’re living beyond your means) you’d do better to make sure the balance is paid off entirely or down to a much lower amount BEFORE the statement date (not the due date – and if you’ve paid off some of the balance before the statement cuts, you’ll still need to make another payment before the due date in order to avoid late charges, as the first payment will fall in a different billing cycle)… that will definitely help keep your scores in good shape, but can also be more effort than you might want to expend!

I use a cash back card (2% from Discover) to buy several $100 gift cards a year. They give me $25.00 worth of gift card for every $20.00 I redeem. While this isn’t a ton of money, it does pay for things we need around the house. I would recommend doing it only if you are disciplined and do not end up spending more than you would have. Also, I recommend using a card that allows you to pay online.

I recently applied for a Chase Freedom card and my score dropped 3 points, according to Credit Karma. So I’ll now have 4 cards and only 1 will have a significant balance to pay off each month. So it’s not that big of a deal.

This is a quality strategy, as long as you control yourself. Some people can’t take the temptation, and they shouldn’t use credit.

I use the same strategy of paying my cards off every month. I view it as using someone else’s money for free, then being paid a bonus on top of that.

My AMEX Blue Cash gives 5% back on gas, groceries, and pharmacy – 5% off in those categories is great! I also get 1.5% back on all my other purchases. (It’s 1%/.5% for the first $6500 per year, then the higher amounts take over). I’ve earned about $300 in cashback since April!

I love my Blue Cash. We’ve just hit the $6,500 mark for the year so the rewards are building up even more impressively than before. Now I just need to hope AmEx doesn’t decide it doesn’t like me and reduce my credit limit to $500, as has happened to countless poor unfortunates who had previously thought themselves to be valued cardholders. Sigh. Blue Cash is (in my opinion) the best rewards card out there, if you can keep AmEx happy.

@jchabotte: Having 2-3 probably helps your credit, overall. Plus, a nice benefit is that you can use different cards different places in order to maximize your rewards earnings. For example, you might use one card that gives a higher percentage on gas and groceries those places, and another for restaurants in order to get more there.

Yep. The only cards I have are rewards cards – AmEx Blue Cash for just about every purchase, Discover More for the 5% cashback categories that aren’t already Blue Cash 5% cashback categories (and for our local bar, that takes Discover but not AmEx), and my 1% cashback Visa for places that don’t take Blue Cash and would earn me some pitiful amount with Discover. All get paid off in full every month (the AmEx gets paid in full every week, in fact), and it’s working out great so far! :)

@jchabotte: The biggest reason that I have more than one card is when traveling. I have seen cards shut down when traveling for charges in foreign countries,even when they were called and told of travel plans. I also put one in the hotel/cruise ship cabin safe just in case my wallet gets stolen, I still have something to fall back on and will not have to stress about how to get by until new cards are issued.

If you’re not living on loans, there are really only a few times you’ll actually need a good credit score. I think that by being responsible and not defaulting on debts, you can generally develop good enough credit to get by in these situations, even if you aren’t carrying a balance on your credit cards, or engaging in other behavior that makes bankers rich.

PS – Buying a car is not one of those times you should be relying on credit – if you can’t afford to save for it and pay with cash, it’s probably more expensive than you should be buying.

@Elcheecho: WHAT? Cars should not be purchased on Credit? That’s ridiculous why should I pay cash for something that when I can use the finance companies money and earn interest on my money. Even at 3.05% your still making something. Especially since 0% APR are not uncommon. Stow the comments on buying a used car…. they are not for everyone..

@nataku83: Thank you. I have many skills, but my eyes glaze over at the particulars of credit scores (we can’t be good at everything). Plus, I just choose not to invoke stress for what still seems to be this odd, arbitrarily-manufactured (in that we all try to second guess the best method) rite of passage for adults. My life is too short to get too entwined with these details, even if it means an occasional award (which still comes at a price).

I almost had to declare bankruptcy a few years back, and a family tragedy then prevented this. Since then, I have one card through my bank that I pay off at the end of some months, and sometimes I’ll carry a few hundred over. I just make sure to pay by the due date. I checked my credit score for fun recently and discovered an account that was missed in the original payments (but clearing that now). Despite all this, my score was still “ok.”

Realistically, I may need this in a few years for another (rental) apartment. I do know that many landlords will take 6 or so months upfront in lieu of perfect credit, and I’m perfectly fine with that.

I do this as well. My two main credit cards are paid in full each month, one of my store credit cards has no balance, and the other has a balance with interest deferred. Never a problem for me and with the miles, I have a free ticket to go to a bowl game this year…..hopefully.

I put everything on my card and just pay the full balance at the end of the month. Citibank must hate me. They have never gotten a cent of interest from me, but have paid out like $500 in cash back to me.

I use my Credit Card for a lot. I get 2% off on gas and restaurants and 3% off at Amazon and 1% on everything else. I can redeem the cashback in gas cards or Amazon gift certificates. Since I love Amazon so much, it makes sense to me.

I also put almost everything on my main credit card and usually only carry a small amount of cash. The credit card payment is automatically debited from my checking. The card has no annual fee and I get rewards.

Assuming that you always pay it off [a big assumption for most people] and incur no fees or interest, the only disadvantage is that you might spend more when using a credit card vs. cash. It’s a lot easier and safer than constantly using the ATM and keeping cash.

Years ago I felt self-conscious when charging something for $2 or $3 but not anymore. The trend is definitely toward using credit and debit cards for small purchases, such as fast food, coffee, and even subway rides. The issuers certainly encourage it and the store employees simply don’t care, they may even prefer it because they don’t have to make change or count as much cash at the end of their shift.

Definitely use a credit card over a debit card because of the potential dangers if a debit card is compromised.

I do exactly what the post says, and I have a pretty high credit score. If it’s something I think I might have issues with or might have problems returning, I put it on my Amex. Same goes for Gas; 3% cash back on that on my amex. Everything else goes onto my Continental Mastercard; it’s paid for a roundtrip trip to Israel and another roundtrip from NYC to California.
So long as you know what you’re doing, you can actually reap benefits from the credit card awards, while still keeping your credit score healthy.

I have 3 rewards cards that I pay off every month, and I put expenses on the card that gives me the most cha-ching.Chase Rewards — 1% on everything and 3% on top 3 common spending categories (but excludes restaurants)Chase Home Improvement rewards … 3% at hardware stores which pays off for my many rental property upkeep expenses Discover — has rotating 5% bonus categories where you can ring up major returns; also around 1% for other purchases (but less than 1% on first 3000 though so I use it less except for in bonus categories nowadays); also can often double your bonus on gift cards to certain stores

I also pay off my balances in full every month, but have been considering opening a second card to help with the credit utilization ratio that you talk about. I’ve had my eye on a WaMu credit card for their free credit score service, but am hesitating now for two (obvious) reasons:

1) I feel like opening new credit right now would be a bad idea (is it really?)

2) (Big one) WaMu effectively doesn’t exist anymore.

Is there another card that offers this service? Or will Chase continue to offer this service to WaMu cardholders even after the acquisition? Any recommendations?

@briancavner: I can’t completely answer your questions, but I can add that I’ve never had any problems with my WaMu credit card. The 1% cash bach and online credit rating make it well worth it.

I didn’t see my rebate check one year because they put it on the bottom of my statement where they normally put those cash-advance-trap checks. The call center did a great job of working and communicating with me.

If you get the offer, I’d call it in or go online to apply instead of mailing it in. The card’s website also says JPMorgan Chase now as well. As we all know, its not like your account just dies when the bank is bought.

@briancavner: Chase has a big credit card operation. I have a card with them (not via WaMu). They share some operations with FirstUSA (or maybe they bought out FirstUSA, I forget). If the offer looks reasonable, go for it. You can call them up if you want to confirm that they’ll still honor the offer now.

You don’t really want to have multiple cards with the same bank or even the same processing agent. So if you have another account with Chase or FirstUSA, not a good idea to open another one. It costs you flexibility in doing balance transfers if that becomes necessary or advantageous. Nobody lets you balance transfer from one of their accounts to another of their accounts.

@Flame: I do the same thing but I don’t understand why that would annoy them. I usually get my new statement by the 5th of every month. I get paid on the 15th and 30th so i pay half the balance on the 15th and the other half on the 30th and it’s always paid in full a week in advance of the due date. I would think they love that since they are basically getting paid early and can get interest on it.

@zarex42: Why pay it off twice a month? The money is an interest free loan as long as you don’t miss the due date. I’d rather have it in my 4.00% savings account than give it to the credit card company prematurely.

There is always some colossally weird advice in the comments on this website.

And someone might say, yeah but 4% on a small amount for two weeks isn’t all that much. But let’s say you charge $35,000 a year on credit cards and always pay the balance in full when it comes due. Think about that extra 4% on $35,000 for 24 weeks…

@stevejust: well if you look at it that you are just trying to get points/cash back and are making purchases you wouldn’t have put on the credit card in the first place then you really aren’t losing anything by paying early.

but there’s all kinds of reasons people pay early. I pay my credit cards twice each month but I also have a high yield savings account. Part of the reasoning is that I only put money IN this account. Absolutely no withdrawals unless absolutely necessary. Another reason I like to pay early is that you never know when something will happen and money is needed elsewhere. At least paying half midway through the billing cycle guarantees that I did not miss a payment and that I paid more than the minimum.

@bravo369: But if you pay early, the credit card company gets to earn interest on YOUR money. I’d rather earn interest on my money. I don’t see missing a payment as a risk at all, since I really use only one card at a time (switching cards when points incentive runs dry to next best deal for me).

I agree completely; missed that part. There’s zero reason to pay off any CC bill in advance. Just use your bank’s (free) bill pay service to pay it off the day it’s due (or a day earlier to play it safe). You also save the cost/hassle of stamps, checks, etc.

@Flame: Why pay back twice a month? You are just giving your money to them before you need to.

It is good to charge everything, as people are saying, as long as you never carry a balance. You get protection and rewards. I do this all the time and when I bought my house, my credit rating was 817, so I don’t think it hurts much.

One thing I found out recently (with the house) is that you can use a credit card to pay off the property tax and insurance of the house. That is a good amount of cash back or about half an airline ticket. Just don’t carry the balance. :)

We’ve been using National City’s credit card with some nice cash back. 4% on gas (that was quite significant until we stopped comutting), 3% on movies and movie rentals (Netflix took care of that years ago), 2% on food from groceries, restaurants, and fast food, and finally 1% on essentially everything else. They don’t send you a check each month, but after you accumulate $100 in “rewards”.

We switched from using debit cards exclusively (I’m not a fan of “points” or the lack of protection from theft). Now we get $100+ checks in the mail every few months with our standard purchases. We maintain no balances, so that is all “profit” for us.

My wife and I keep one, or at most two credit cards at a time, and pay them off every month. Ditto what another poster said about the Blue Cash card, just got it :)

One time I called the bank and the person on the other end couldn’t believe my credit score. “I’ve never seen one this high…” I’ve barely ever looked at it, just pay my bills and pay off the credit card every month.

So my advice is don’t stress about your credit score. DO be anal about paying your bills and cards off every month. Works for me, I’m 27 and my score is above 800 /shrug.

I used to do this, but found (once my husband and I combined finances and we read Total Money Makeover and got serious about getting out of debt – most of the debt belonged to my hubby) that I spent a lot more money (basically double) when I used credit vs. debit.

Everyone is going to say that clearly the problem is me and my lack of control and that could be true. But what I found was that when I used debit I knew the money was coming out of my checking account now and that made a difference vs. when I was using credit and just thought about it later when the bill came (and yes I paid the bills in full for years and years). When I switched to debit I was more engaged with my spending, thinking about the purchases and making sure I needed or really wanted to make that purchase.

At this point, I could probably go back to credit and stick to the same mindful habits but I very much enjoy not having a credit card bill. We do have CCs that we use for travel or if we need to make a purchase on which we want the extra protection. And, fyi – I get points for my Visa debit purchases.

@SadSam: Debit card rewards points are generally inferior to the rewards on credit cards. But to your point, this is why I said upthread that whether this is a good idea or not depends on your spending psychology. For some people, like you apparently, it doesn’t seem like real money when it’s on a credit card for some reason. For other people, like me, we do all the things you mentioned about being engaged with your spending regardless of what method of payment we use. I don’t even consider my credit card use “debt”, because I mentally consider the money gone the second I spend it.

Also, a lot of the best rewards points are for things like gas. Even if you just used your credit cards for that, you could potentially get a significant amount of cashback on many cards. And I doubt you’re going to burn more gas and spend more just because you paid for it on a credit card, since no one buys gas on impulse. Just a thought for a useful “halfway” point if you don’t think you can spend as reasonably on things that give you more latitude of options.

@SadSam: Dave Ramsey claims that people who use credit cards spend on average 12%-18% more than people who use cash. Even though I pay my bill of every month, I would have to agree. I hate cash and I don’t want to use debit bc of fraud reasons, so me and the wife do our best to limit our expenses.

@Mr_Mantastic: Budgeting/limiting spending is a different thing from using a credit card. You shouldn’t use a credit card if you have a psychological tendency to spend more on them. Not all of us do.

I also think that Dave Ramsey’s ideas about debt and credit card use are rooted more in his ideology than in reality. We’ve discussed these “studies” that supposedly show that people spend more with credit cards before, and I think they’re dubious at best. Some people may, but I don’t think that’s true of most people who pay their credit card bills off every month, and anyway the studies don’t really provide evidence for that broader claim (D.R. just extrapolates from the actually supported data to fit with his message). And some of these studies also used very dubious methodology (such as contrived situations without real money being involved, tiny study groups, or raw statistical data on spending that doesn’t account for WHAT people are actually buying. For example, the average spending on a credit card might be higher just because people are more likely to put a new refrigerator on one than a fast food hamburger since they don’t like carrying around hundreds of dollars in cash).

I know that Ben Stein does this (I was watching a pbs program about credit). The credit cards hate him (and apparently you) because they have no interest to charge, so they don’t reap an benefit, no matter how much is charged on the cards.

Hey, he’s a former Econ professor and a very intelligent man. If you’re doing the same as him, then you can’t be doing too much wrong :-P

@johnva: Ben Stein is allegedly smart, but I’ve never seen much proof he is.

Here’s proof he’s wrong about it: every consumerist reader should know by now that credit cards charge merchants fees everytime they process those cards through their terminals. So while the credit card company doesn’t make money from you on interest, they make money from you per every transaction you conduct.

But they do reap a benefit – in the form of merchant fees. Anyone who uses their credit card for every single purchase they make, from their morning coffee to their couch to their cellphone bill, is making the credit card company a very nice amount in merchant fees. There are credit card issuers that pitch themselves at different segments of the market – some want the customers who will be carrying a balance for months on end and paying a hefty amount of interest (and possibly the occasional late fee or overlimit fee too), and some are well aware that there are people out there who don’t “need” credit because they can either afford to buy everything they want in cash, or who are disciplined enough to stop themselves buying what they can’t afford – but guess what, there are plenty of credit card companies out there that actively want those very people to be their customers. They don’t necessarily want them to be their customers because they want to trick them into getting horribly in debt and paying interest etc, but because if they can talk the customer into using their card a lot (with promises of cashback, frequent flyer miles, whatever – not to mention the purchase protection, etc), then it can be a win-win situation for everyone – the credit card company gets to make some money from each and every transaction, and the customer gets a little payoff in the form of cashback or whatever their chosen reward is.

Credit card companies don’t ONLY make money from interest charged on balances.

I would say, of course it’s good! I have never paid a cent to my credit card company since getting my first card in 1991!! *they hate me* I have the Chase Perfect Card that gives you money back every month. I’m the evil person on the controlling end having them pay me to use their card ;)

I have a Citi Amex that gives me 3-5 points per dollar depending on where I shop, and with every 20,000 points, I get a free flight. I put everything on the card, pay it in full, and earn a free flight every 4 months. If you’re responsible, putting everything on a card can get you excellent rewards.

If you can use credit cards responsibly, then they are a powerful tool for managing expenditures, building a credit rating, and racking up rewards points.

I have a Sony Card, and in the several years I’ve had it, I’ve used my “sony points” to get, for free, several hundred dollars in consumer electronics (digital camera, bedside clock, etc.) and video games. All at zero cost to me. It was a great deal.

You might think there is no cost for you in receiving rewards from your credit card, but in the end you do pay for it. The credit cards fund rewards programs by charging the merchants higher transaction fees, which of course the merchants then pass on to you.

FAIL.
Your FICO score is negatively impacted anytime you use more than 20% of your revolving account (credit card) limits. This is regardless of whether or not you pay your balance in full or just make the minimum payment. Your card issuer reports some basic information to the credit bureaus every month: your credit limit, your highest balance during the billing cycle, and whether or not you paid as agreed (on time). Let’s say, for example, that your card issuer reports your information to the credit bureaus on the 15th of every month. If at the time of this reporting, you are using 70% of your card limit, that will negatively impact your FICO score regardless of the fact that you pay your balance in full on your due date of, for example, the 20th of the month. In this example, although you’ve paid in full, you are still penalized for using 70% of your limit because of how the card issuer reported your balance.

If you pay off your credit card balance every month, you are termed a “transactor” by the credit card companies. They don’t like that you just use it for transacting business, but they don’t do anything to hurt you just because you do that. The credit card companies still make money off of the transaction fees on each purchase you make. However, they will try to entice you into becoming a “revolver”, which is someone who keeps a balance every month, and so is paying them monthly interest. They will offer you balance transfer rates and special points and rewards, all designed to make sure you charge more than you can pay off in a month.

I tend to do this both for points and security but it wasn’t working quite right until I started tracking my purchases vs income on a spreadsheet. Once I began tracking it I could make damn sure that I wasn’t running a deficit month to month, which sometimes was a problem in the past.

I also do this (charge everything to CC’s, pay it off every month, collect rewards / rebates.) My credit score is pretty high.

That said, bear in mind that paying of your credit cards each month does not equal having no balance. The credit cards report your balance to the credit reporting agencies based on your statement balance, not what you’re carrying over from month to month. So if you regularly charge $2K on your CC per month, and pay it off (thinking that you thus have a zero balance), and then charge up another $2K before the next statement cuts, the credit card company will actually report a monthly balance of $2K. So the point is, make sure your credit rating can handle that balance report (which then counts against your “ratio” – total balances vs total credit limits.) And in fact, in that instance, it’s actually better to have more cards (raising the “total credit limit”) and use few of them (assuming the company lets you keep doing that…)

Let’s not forget that paying off your credit card every month (or however long your statement cycle is) definitely helps your cc company. While they may not be earning interest on you, they are getting the aforementioned merchant fees. More importantly than that, though, they can show shareholders and investors that they have fully current cardholders on the books. That kind of thing always looks good, and ESPECIALLY in the current environment.

people forget about data-mining. although i do the same thing (pay off balance every month and just collect points) there may soon come a day when you will wish there wasn’t a huge detailed inventory of your spending habits in a database somewhere that you can never get rid of.

same goes for the years of email backed up in my gmail account. one day these historical records are going to be extremely valuable for the companies that own them. You can consider the 1% cash back your “payment” for knowing everyplace you’ve bought something for the last decade.

My BF uses his credit card for about 99.8% of all his purchases, and pays it off within 12 hours of their posting the bill every month. The reward points have been really, really good to us — multiple gift cards, and a free hotel night in Puerto Rico! His credit score’s pretty damn high, too.

I am actually going to start doing the same once I have my balance paid off. (Should take about another year — my balance is from (a) a year of unemployment, and (b) having to move 3 times in 18 months.)

Been doing this for years with no problem. Watch out for late arriving bills followed by a late charge the following month. I caught the bastards trying this more than once. They always have some lame excuse about bills getting held up. And they always reverse the fee.

Credit card companies make money when you don’t pay off your balances on time, as interest. What this means is that credit card companies will consider you a bad investment if they see on your credit history that you never miss a payment. So be sure to intentionally miss a payment every so often. And remember to use the card often – cards that are not used can sometimes be disabled for ‘inactivity’.

I’m the type of person that couldn’t deal with credit cards. I had 4 of them 3 were VISAs. I ran up the debt and couldn’t keep up with my payments. Eventually I understood what I was doing was stupid and paid off all of my balances. My credit score was shot and I lost all of my cards. To re-build my credit I got a secured card in the early 90’s and started charging and paying off the entire card before I got the bill. By 1998, my credit was better and I had received another card from my bank and my secured card was transferred to a un-secured account. 10 years later I still had that card but just closed it because the credit card company refused to lower my rate of 23% (19% was their best offer) and it had a yearly fee (split monthly) that my two other cards waived. I was told by the cc rep and a family member that it was a mistake because that was old credit and that’s more valuable than the other credit accounts that are 5 to 7 year old.

Since I rarely held a balance on that card the percentage rate barely concerned me but the monthly fees and the fact that you get bills online or mail but not both made it hard to remember to log in and pay that fee.

As mentioned before, the credit card companies derive the majority of their revenue from the 2-3% cut of millions of dollars of purchases that are rung through every minute. Interest on carry credit card debt is entirely secondary. The credit card companies want you to spend spend spend.

@gmark2000: Not just interest but late fees, over limit fees, cash advance fees are great negative activity profit centers. If not then why have they increased these fees at an incredible rate over the last two decades?

Kind of like bank ATM transaction fees- once they saw how profitable raising fees were they got on the hog!!!

WoW! I can’t believe some of the crap I’m reading. You all are brainwashed by the CC companies. Everyone should checkout the movie, “MAXED OUT” by James Scurlock. He also has a book out by the same title. If you are all on the same band wagon as the “We Hate Bush” via Farenheit 9/11 cult, then you should consider really watching the aforementioned movie.

I like having all my expenses in one place – you can review the bill and then decide what things should be cut down or cut out. At the end of each year, Citi povides a summary of the year grouped by typs of expense – retail, food, lodging, etc. Very useful (and a bit scary the first time).

I also like the protection of the cards – when my wife’s new treo was lifted from her purse at a bar, mastercard covered it to the tune of $350 – we had to chase them a bit, but it was totally worth it.

one thing i’ve heard lately is that paying your cards off in full every month can negatively impact your score in another way…it might not show a “regular payment history”.

i haven’t determined if this is fact or fiction yet, but it is something to think about. perhaps some of you that utilize cards in this way could help – does your 24-month payment history on the trade lines for these cards look like this:
111111111111111111111111

or like this:
1XXX1X1XX111X1XX111X111X

the second example indicates infrequent payment history (an ‘X’ means payment data is unavailable for that month) & could affect your ability to obtain credit (from what i hear).

again, this is something i’ve heard recently that i cannot confirm or deny, so please don’t take it as credit gospel.

If you make a payment, that payment is going to be reported to the CRAs, whether you paid the minimum or the full balance. So you don’t need to worry about that impacting your score. What will impact your score is if you pay all of your credit cards off in full every month and have all of them report a zero balance to the CRAs. The FICO formula seems not to like it if you’re showing no credit utilization at all, and your score will drop a bit accordingly. (Incidentally, allowing a card to report a balance does not mean you can’t pay it in full, or that you’ll pay interest on it – if you DON’T want a card to report a balance you can just pay it off before the statement date – any card with a balance on the statement will have that balance reported to the CRAs, so you can still pay it in full immediately afterwards).

What appears to be best for your FICO scores (and this is obviously only a ‘game’ you really want to bother playing if you want your credit to be as perfect as possible to qualify for a good rate on a loan, etc) is to have an overall credit card utilization of less than 4.9% (although if you can’t manage that, below 9.9% is good too), with fewer than half of all your open accounts reporting any balance at all – and the utilization on each card that does report a balance also being below 4.9% of that card’s limit. And by “fewer than half of all your open accounts”, I mean “accounts” including mortgages, car loans, student loans, etc. So if you have a mortgage and a car loan and 4 credit cards, that’s six accounts in total, so your score will suffer a bit if you have more than two reporting a balance – and as the mortgage and car loan will ALWAYS report a balance, that means your score will be best if your credit cards NEVER do (although having one card reporting – ie making it half your accounts reporting a balance – is better than ‘more than half’…)

Like I said, though, this is all far too much effort to be thinking about unless you have a really good reason to care whether your score drops a bit because of some formula that’s looking at the balances on your credit cards etc. If you’re shopping for a mortgage, a few points either way could be important – but if not, so long as you’re not maxing out all your cards and making late payments, you should be just fine!

Yikes. I’ve spent waaaay too much time on the myFICO forums – this stuff has just worked its way into my head by osmosis, I think!

@mac-phisto: Total fiction. Any amount you charge within a month that is still on your account when your statement posts (generally) will get reported to the CRA’s. The FICO formula doesn’t have any idea whether you’re actually paying interest or not, because that information isn’t on your credit report (at least, it’s not on any report that I can see as a consumer). Now, it might hurt you slightly if you simply don’t use your card and your statement balance is zero, but only very slightly. Not really enough to be worth worrying about, in my opinion.

Most online savings accounts pay out interest based on average daily balance so the longer you keep your money in there the more interest you will accrue. I make an extra $50-$60 a year in extra interest just by paying my credit card off at the last possible moment.

Wait until the beginning of a new billing cycle for large purchases so that you can keep that money in savings for about 60 days.

@pauljunk: How does one best track when the payment is due? Write it on a calendar, in an electronic schedule format?

Your premise (and alot of folks premises here) also figures that people have alot money to save in high interest accounts or easy access to such money vehicles.

Basically unless you are a money or credit geek, not using a credit card (for the vast majority of people a debit card is good) is safer than using one. Kind of like speeding in your car, some people do it by taking precautions (radar detector, cb radio, PBA card ready) and never get caught, while other people do it with less awareness and get caught quickly and pay!

The thing that gets me is that several years back I was strongly advised to close out any open unused credit cards I had. The reasoning was that when you have a credit card with, say, a $5,000 credit limit and it was sitting at $0 then you had the potential to instantaneously raise your debt level by $5,000 which would require at least some new monthly payment amount.

Since companies only want your total overall debt load to be a certain percentage of your income that would make them willing to loan you less than they otherwise would…

@Tonguetied: Some of this reasoning (pro and con) can be found in the App-a-rama environment. That is where people apply for huge amounts of credit cards at the same time in order to get the most amount of credit before all of the potential debt levels are figured by the companies. Most often used by credit card geeks who park 0% interest money in high yield savings accounts.

@Tonguetied: That’s a common misconception, but it’s basically wrong as far as the FICO score goes. Manual underwriting might be another story, but I wouldn’t worry about that until someone actually tells you “I’m not giving you this mortgage unless you close some credit cards”.

So, with regard to this whole credit utilization ratio thing: I’ve heard several times that cancelling a credit card hurts your credit score, and this makes sense with your ratio increasing. However, if you are only using one card and pay it off in full every month (so you have a ratio of 0), would cancelling an extra, unused credit card have any effect on your score?

This is the situation I’m in where I have a Macy’s card that I really don’t need and haven’t used in years, but I’ve refrained from cancelling it due to these warnings. I guess I could just cut it up, forget about it and just keep my credit limit higher, but I’m curious.

So long as you’re organized and make sure you spend only what you can pay later and have a proper budget, I see no problem. You might want to look into your credit score using one of the three legit sites (search for it on this site) and see if you can apply for a card with a better rewards/cash back system. IIRC, the Visa Platinum with gas rewards have the best returns, but that may have been back when gas was more expensive (it could spike back up, of course).

This is how my wife and I do things. We put just about everything on Credit cards and pay them off, in full, every month. Twice a year we go shopping for clothes off of the reward points and usually end up spending, out of pocket, like $20, but get 150-200 worth of stuff. Since we don’t pay interest and accumulated the points you could say our attire is totally free. I like the method, but it is a little dangerous. If I lost my job we could very easily be behind by a month and have a fairly large bill. But believe me the disdain that I and my wife have towards paying interest keep us from ever not paying full.